Our views

Gilt corner: Dear Philip…??


Paul Rayner, Head of Government Bonds

16 October 2017

High inflation contrasted with wage growth stagnation lay the groundwork for some overdue excitement in gilts this week. Starved of any concrete economic news to position it one way or the other, the market in conventional gilts was particularly quiet last week, with marginal excitement coming from US inflation data last Friday. While the final figure turned out lower than predicted, the market rally suggested that it was looking for something stronger than the 2.2% (or even the 2.3% consensus). However this is unlikely to de-rail the December hike from the US Federal Reserve.
Liability driven investors enjoyed a feast of inflation linked buying, driving 30 year break-evens 7bps higher over the course of the week. This follows a recent trend in inflation linked gilts, which has seen a steady rise in break-evens since the last syndication. However, with 30 year index linked bonds being auctioned on the 24 October, and a 30 year syndication expected a couple of weeks later, we’re expecting this tidal wave of new supply to extinguish the recent rally. Elsewhere in our funds, we have taken profits on cross market positions, as the UK fell out of favour with international buyers ahead of a potential November rate rise.
This week it’s eyes down for UK economic bingo. While it’s easy to get lost amidst the whirlwind of new figures for UK retail sales, unemployment, wage growth and inflation, two numbers will be key in determining Monetary Policy Committee rhetoric. Firstly, we’re expecting wage growth to be in line with market expectations at 2.1%, maintaining the real income squeeze on UK consumers and weighing on the pace and scale of any rate hikes. Secondly, while inflation is forecast to hit 3% for the Consumer Price Index and 4% for the Retail Price Index, the risks for these numbers lie definitively to the downside, perhaps sparing Mark Carney delivering a ‘Dear Philip’ letter ahead of the budget!
In our view these two key numbers, which will be closely watched by policy makers, should spark the gilt market into life this week. 

High inflation contrasted with wage growth stagnation lay the groundwork for some overdue excitement in gilts this week. Starved of any concrete economic news to position it one way or the other, the market in conventional gilts was particularly quiet last week, with marginal excitement coming from US inflation data last Friday. While the final figure turned out lower than predicted, the market rally suggested that it was looking for something stronger than the 2.2% (or even the 2.3% consensus). However this is unlikely to de-rail the December hike from the US Federal Reserve.

Liability driven investors enjoyed a feast of inflation linked buying, driving 30 year break-evens 7bps higher over the course of the week. This follows a recent trend in inflation linked gilts, which has seen a steady rise in break-evens since the last syndication. However, with 30 year index linked bonds being auctioned on the 24 October, and a 30 year syndication expected a couple of weeks later, we’re expecting this tidal wave of new supply to extinguish the recent rally. Elsewhere in our funds, we have taken profits on cross market positions, as the UK fell out of favour with international buyers ahead of a potential November rate rise.

This week it’s eyes down for UK economic bingo. While it’s easy to get lost amidst the whirlwind of new figures for UK retail sales, unemployment, wage growth and inflation, two numbers will be key in determining Monetary Policy Committee rhetoric. Firstly, we’re expecting wage growth to be in line with market expectations at 2.1%, maintaining the real income squeeze on UK consumers and weighing on the pace and scale of any rate hikes. Secondly, while inflation is forecast to hit 3% for the Consumer Price Index and 4% for the Retail Price Index, the risks for these numbers lie definitively to the downside, perhaps sparing Mark Carney delivering a ‘Dear Philip’ letter ahead of the budget!

In our view these two key numbers, which will be closely watched by policy makers, should spark the gilt market into life this week. 

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.